Financing Tightening; Underwriting More Conservative

In August 2010, Vornado Realty Trust—one of the largest owners and managers of real estate in the United States—sold through a subsidiary $660 million of ten-year commercial mortgage–backed securities (CMBS) at an initial interest rate of 4.17 percent.

What a difference a year makes.

“Our timing was very good,” says Michael D. Fascitelli, president and chief executive officer of Paramus, New Jersey–based Vornado Realty Trust. “Since then, rates have come down, but spreads have widened and the market has tightened. The debt markets were recovering nicely until the summer. Then, spreads on CMBS widened 40 to 50 basis points over a few months. Everything has become so volatile. We don’t use a lot of leverage, so we’re not affected as much as some others. But for people who are going to have to put up the money, it’s a major concern.”

While it may be too early to definitively say what trends are emerging, growth is not collapsing as it did during the credit squeeze of 2008 but is merely being delayed a little, he explains. “Underwriting is changing,” he adds. “It’s getting more conservative. It’s a more cautious world. People are more negative and they are checking and rechecking their assumptions. Deals are happening, but there has been a lot of liquidity on the equity side. The volume of deals was coming back to 2004 and 2005 levels, but that’s slowing.”

Since July and August, Fascitelli says, deal flow has been sluggish. “There is still a lot of liquidity for the right deals, but lenders and equity sources are getting more conservative,” he notes.

Fascitelli’s advice to ULI members:

Be nimble. “Be ready for anything in these uncertain times. Don’t get caught unaware or unprepared.”

Be opportunistic. “There will be some good deals out there; you just have to be ready for them. And act quickly.”

Be cautious. Don’t overleverage. “If growth slows down and capital markets become more hostile, don’t get caught in the squeeze.”

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